Crude Du Jour

8-12-16

2016 in review

Macro ceiling

The village idiot refutes Econ 101

And the biggest dick doesn’t always win the game of chicken

Biggest scale

My most macro thesis is that the action in oil price is predicated on the interplay of international central banks, and the subsequent action of the dollar.  We can read the likely moves of our Fed in relation to other central banks, starting from the dollar chart action.  We can then extrapolate this to make guesses about what oil will do.

I have done this in other posts, and will continue to analyze ongoing action in this context.

Based on the correlation of dollar and oil charts, and the oil action I have witnessed on news days, I see little argument that supply and demand is actually the main driver in oil prices.

macro $ waves

$ oil levels, click to enlarge

I think the primary driver is the dollar, and the second biggest driver is where the market is positioned (technical trading….value is relative to where value was at other times in history, more than due to econ 101, supply and demand, fundamentals.)

In my opinion, it’s not wise for a practical futures trader to go down the rabbit hole of trying to decipher market fundamentals.  If you were a pundit, a blogger, or maybe had to write OPEC’s massive annual report on the subject, maybe fundamentals are for you.

But, if you want to be honest, and not just say words that sound good, you would have to look past things like growing and shrinking inventory reports, rig counts, Iran or SA ramping up production, or Nigeria or the Congo melting down.

You would have to look at the underlying health of world economies.  You would have to guess if they are likely to grow in upcoming years, or vice versa.  And sure, if your idea is grow, then it would sound logical to say that they would consume more resources, like oil, and therefore, price would go up.

But again, if this was your story about the future oil price prospects, you would be disingenuous, or just dim.  Because, the actual story about the relative strengths of various world economies (vis-à-vis) the price of oil, is primarily a question of how their central banks will react, to their economies, and each other’s actions, which are predicated on their economies, which are predicated on their actions, and so on, an infinite regression in a fun house.

And if that is not bad enough, central bank policies in 2016, all over the world, are in uncharted waters.  We cannot make guesses based on history.  Since never before have banks printed money on such giant scales, dug seriously in to negative interest rates, bought so many corporate bonds, and so on.  Freak-me-out variety behaviors.

So if, like me, you’d rather try to make money, and enjoy life, and be more likely right than wrong, or confused, it’s much easier to read the future based on charts, rather than mess “deductively” with “fundamentals.”

Use charts of oil, and the dollar.  For deeper insight in to the dollar, look at the forex charts of how it compares to the other main currencies in its basket.  Reason what the world will do “inductively,” starting from technical phenomena in charts.

So people think you’re the village idiot.  Who cares?

 

Today

My main hypos this morning were all up.  Hypo 2 played out.  My first target was $44.50 ish.  I had the level marked on my chart as “weak resistance.”  Turned out to be not so weak.  And looking back in time, I see why I underestimated it.

The action today seemed wild and weird if you stood too close, but on a bigger time frame makes perfect sense.

The Swing story

Note: although almost all big moves happened on Wednesdays, inventory reports, the moves were infrequently in the direction the news suggested.  Detailed study on this to come, if it does

The story since 10 days ago is: Wednesday, 8-3-16, a big buyer stepped in, and reversed the oil slide.

oil bottom

Oil had been sliding since 6-10-16…so, about 2 months.  (While, surprise, the dollar had been climbing!

On 7-20-16, another Wednesday (inventory report) the decline accelerated into a waterfall pattern, which pierced the critical level of $42.88 (on 7-27, another Wednesday) which I chronicled in my “oil bellwether” post.

To me, this was a groundhog day moment, signaling a more sustained down move, or sideways action, in oil, before a significant up move might be mounted, to move the product through the 2016 high of $52.78 (adjusted contracts.)  I said at the time, this did idea did not preclude a bounce.

Here is a picture of the break I believed was meaningful (even though 61.8% held)

break of 2016 50%

After that late July important break, oil established a new distribution under this critical breakdown level.

Then on the next inventory report, we get the dramatic day, chronicled in Crude, In the Zone, when some huge buyer stepped in.  I speculated whether this was an entity like Exxon, or a large scale, hedge fund type, trader.

The huge surge up, which followed through higher the next day, dutifully technical, attracted titans like flies.  The volatility brought in larger scale “locals,” people with bigger accounts to swing around, who could move markets with their positions, and sustain losses that would crush smaller players.

The next Wednesday on inventory, we got a sharp down move, which looked like it should follow through down the following day, since it was impulsive.

Then we got historical action on Thursday.  A HUGE buyer, maybe the same one who stopped the oil slide at the bottom, stepped back in, and drove the price way back up, all at once, not only eating through all of the news day inventory, but also the 3 days before that.  It was a bigger up wave than the one off the bottom.

The titans swarmed like bees to honey, like flies to dung.  The next day, today, promised to be wild, and it was.

But first, history

Who has the biggest dick in the world?  I don’t know, but as a rule of thumb, there is always someone else bigger.  And you can only get so far swinging your account around.  A gang of guys with medium ones, or a revolution of Asians or whoever, could turn any tide.

Why does price turn around at areas of consolidation (flags, ranges) on any time frame?  Why do these pockets of sideways auction action create levels of “support and resistance?”

It’s a somewhat allegorical idea, but also probably sometimes literally true, that within any area of consolidation, there are people positioned in both directions.  When price leaves that area of consolidation, only some of those people admit they are wrong, and stop out.

Or maybe they are not wrong….maybe they are playing on some other time frame.  But perhaps when price goes farther against them than they anticipated, they start to believe they are wrong.

Then, when price comes back to that area, and they get back to “break even,” they sell, or buy, depending on the situation.  They flatten their position.  So that price at first resists moving back in to that range, or flag, or consolidation area.

So, when you look at oil over 2016, what happened?

oil, 2016, as of Aug

If found a bottom, formed a base, and moved up.  It retested the year open, moved down, tested the main body of the lower consolidation, found a base, and moved up again.  It again resisted at the year open, and after 5 days of tapping it, pushed through (red to green).  Now the year is a green candle, with a tail at the bottom.

From April, it moved up in “price discovery,” mode, seeking the new “fair market value” range to auction.  After about 2 weeks, the base of a higher range became to establish.  This was used as a foundation to explore higher.  Throughout May, a top started to form.

In, for 3 days, price explored above this range, and found it “too expensive,” and returned to the comfort zone.  It further auctioned this range throughout June, and then in July, started to test the lower part of the range, the base formed in the spring.

On 7-20, on news, price tried to explore lower, but quickly rejected back up, back in to range.  At this point, there was the potential for the 80% rule to trigger, and price might have resumed up, and proceeded to new highs.  But no.

Let’s look at this day in detail.

Range fail

7-20-21 range fail

Price had fallen ahead of news, then when the inventory report was released.  Price rallied back up, and ran $1.56 (not a huge news run) in to range.  Then fell from the top, to close 60 cents below its high.  Since 30 cents in one standard deviation, this is technically an impulsive move down.  And a big green candle, that does not finish within the top 30 cents of its range is unusual, and would not necessarily lead to upward follow through.

Still, however, price was well above the mid of day, and technically a larger wave form bull flag.

The next day, a Thursday, price opened below the Wed close, and wicked below 50% of Wed range.  The next hour, it tried lower.  And that was the death knell.  The day took back almost the entire news wave, closed at the bottom, and outside of a range low that had held for 3 months.

This was a critical psychological level.  At this point, every long term, swing position long, from May 20-July 20, was now under water.  Overnight, price continue on to test the news day low, and later breach it, and from that point on, it was game over, longs!

July 20 slide

In my homework, I had marked this level as “weak resistance,” not having really thought through what had happened on that fateful day, a mere 4 weeks ago.

It’s not that I don’t think it can get through this level, and test higher.  But there would certainly be some of those allegorical longs, who were made almost whole at this level, who remembered this at the moment when they were definitively wrong, and watched their accounts bleed $5000 per contract over the next 2 weeks, and then saw it slowly coming back since.

It is also noteworthy, that the rotations off the bottom, particularly the impulse on Thursday 8-11, were larger than any of the down waves that took oil to this local bottom.  So yes, there is power behind the move.

And I was thinking (and still think) a more natural target for the up move, would be to test up against the more solid bottom of the range, and the round # of $45.  And then to $46, a clearly critical level.  And this may well happen next Monday and Tuesday.

I was looking at it like this.  The “weak” resistance seemed pretty inconsequential.

$45-46 target

But when you look at the yearly chart, or put this picture in context of the overhead inventory, the giant 3 month range that forms a ceiling of wrong longs, this little squirt off the bottom is put in context.

8-12-16 overhead range resistance

Yes, it’s coming up hard off the bottom.  There is momentum.  But it is headed straight for a brick wall of probable liquidation.

I would not be surprised to see it drift up Monday and Tuesday, but in nearly balanced days, that each test slightly higher, then on 8-17, on news, a flush down.

My day

So, while my idea that the market wanted up was correct, and my hypo 2 worked out more or less as planned (and I somehow still managed to fail to capitalize on it), I was looking too myopically at the big wave up.  I was mesmerized by Exxon or the hedge fund titans and their big swinging dicks.

What I didn’t take in to account was that we were careening at 100 miles an hour, straight at a solid wall.

Here’s today in detail

8-12-16 action detail

Price opened just below yesterday’s close, and immediately zoomed up, as per hypo 1.  Wicked outside of yesterday’s high, quickly failed back in.  Scored a few bucks.  Didn’t get very far at all, before it ground back up, and out of yesterday’s range again.  At this point, hypo 2 changed to hypo 1.

Especially after it repeatedly got above yesterday’s range.  However, it never pulled back for one final flush, before moving up, like I thought it might.  So I failed to take the long that was my main plan.

Then, in that flag, against my “weak resistance” area, I started getting long, late to the party, and ended up getting chopped up.

That vicarious liquidation break in the grey oval was bad for me.  And yet, it couldn’t get below the mid of day, and couldn’t get back in to yesterday’s range, and then was quickly “engulfed,” which is a fractal of the action off the bottom on 8-3 (wed news day), and then the huge (non-news!) wave yesterday, 8-11.

I did to some extend follow the story correctly as it happened, and succeed in recouping some losses.  But losing sight of context can be costly.

I heard a quote from some hedge fund guy recently, that said oil was now “untradeable.”  I market behavior varies from time to time, so hopefully I can stay agile, as I get more consistent, and perhaps become a cyborg if necessary.

Here’s how the day played out, in context of the last few days

8-12-16 context and play

Price got back above the upper distribution of this time frame, which formed an upper range.  The top last night looked like a head and shoulder, like a mirror of the bottom from the night before.  But price didn’t even sniff below that level today.

Hypos

These were my oil hypos today

8-12-16

Opening near yd close, inside yd range

On top looks like mirror of yd on bottom

Hypo 1: try up, out of yd range, quick fail, fall to $42.64, then back up

Hypo 2: try up, hang above yd range for first hour, dip briefly back in to about $43.40, then up

Hypo 3: chop, resolve down, bounce from $42.64, then up

Hypo 4: move immediately up, hold above yd range, continue up, not looking back

Hypo 5: chop, try down in to yd range, hold, try out of yd range, fall back in, close near open

Hypo 6: chop, fall back in to yd range, break yd mid, continue down

First hour, price pushes out of yd range, at 15 min, fails quickly back in, looks like hypo one, doesn’t get very far….buyers grind it back up.  At 30min it’s out of yd range again.  Holds above yd range for 10 minutes.  Briefly back in, less far this time.  Pushed out of yd range a 3 time at 45 min.  Slightly back in.  Buyers come in more force, push it well above yd range.

At this point I’m looking at hypo 2.  I’m taking the range of yesterday’s high through overnight low as a range.  I’m looking for how to get on board for a long.

If it fails now in to yd range, goes down to overnight low, then back in, I look for the 80% rule, which takes it back through Yd high, then on high, then a runner goes further.

In hypo 2 it still falls back in to yd range, but I don’t want to play the short side, because the bigger picture is yesterday’s strength.  And now hypo 2 has become hypo 1, and hypo 4 has become hypo 2.

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